Business Spectator - Competition must again be king of the telcos

Most commentary on the Coalition’s recently released broadband policy, inevitably, has concentrated on download speeds and capital cost.

But just as important are the measures in the policy to stimulate competition in the Australian broadband market. 

Increasing competition has long been a bipartisan policy objective in telecommunications – going back to the end of Telstra’s monopoly in 1991.

In the mobile sector, vigorous competition between network operators has delivered steady price reductions, continuing improvements in network reach, and successive waves of new technology investment (from analogue AMPS to second generation digital GSM to third generation mobile broadband, and now fourth generation.)

In the fixed line sector, progress has been more difficult, largely because of Telstra’s dominance as the owner of the only ubiquitous fixed network.

Most of Telstra’s fixed line competitors resell services on the Telstra network. As the only vertically integrated player in most areas, Telstra has used its market power to maintain its dominance. 

Standard techniques used by a vertically integrated incumbent include offering slower connection and repair times to a competitor than to its own retail customers; and price squeezes, for example sharply dropping its retail price without changing wholesale prices.

Because of Telstra’s fixed line dominance, consumer broadband take up was slower in Australia than in other countries, as I documented in my 2009 book Wired Brown Land: Telstra’s Battle for Broadband. Australian retail broadband prices were (and remain) some of the highest in the world, and Telstra was relatively slow to introduce technology upgrades like ADSL 2+.

Labor’s broadband policy settings have made a bad situation worse. Rather than stimulating competition in broadband, Minister Conroy has weakened it, in four critical ways.

To start with, he legislated to ban the construction of new broadband networks – unless they agree to adopt the same (wholesale only) business model as NBN Co.

Next, he contracted with Optus and Telstra as owners of the two cable networks to stop serving retail broadband customers with these networks.

Third, he effectively ended competition in the provision of fibre networks in new developments, instead nominating NBN Co to do this in large estates with Telstra to supply small estates (not necessarily with fibre). This made it financially unattractive for developers to choose other suppliers. 

Finally, while he promised ‘structural separation’ – that is, breaking up the vertically integrated Telstra so that it was no longer both the dominant retail player and the only network owner – the speed at which this happens depends on the network rollout. 

As the NBN is built in each ‘fibre serving area module’ of around 3,000 premises, Telstra shuts down its network and moves its customers across to the NBN. But the rollout is going extremely slowly – and the slower it goes the longer Telstra remains a vertically integrated network owner and retail operator in any given part of the country. 

For example, NBN Co planned to pass 341,000 premises with the fibre network by 30 June 2013. But it only passed 72,400 premises by 31 December 2012, and NBN Co has now admitted it will fall well short of its June 2013 target.

Should the Coalition win the next election, we will tackle each of these problems.

We will remove the ban on competing networks being built, and remove the restriction on the cable networks being used to provide broadband services. 

We will encourage greenfields fibre construction by companies other than NBN Co, by changing the current legal and financial incentives which drive developers towards NBN Co and away from competitors.

Most importantly, the Coalition’s plan will see a markedly faster rollout. As the fibre and nodes are built out in an area, and the copper is connected to the nodes, control of the communications services at each node will cut over to NBN Co.

This will happen significantly more quickly than the current rollout – in turn speeding up the arrival of complete structural separation around the country, with Telstra no longer a vertically integrated network owner and dominant retail player.

Labor’s broadband strategy is massive public investment to achieve a “once and for all” leap to technological nirvana. In a sector as fast moving as telecommunications, this is futile.

The right approach is to ensure that market participants have the incentive and capacity to make continuing investments to keep upgrading their networks as technology evolves.

Telstra’s dominance and vertical integration means that incentive has been weak – leading to the underinvestment in fixed line broadband we have seen for many years.

Labor’s NBN policy did little to fix that fundamental problem for the long term; the Coalition has now laid out a speedier path to a broadband market structure with the right incentives at work.

Paul Fletcher is a Liberal MP and former telecommunications executive.

Read the full article here.